Stock Loans in Incomplete Markets

DOI10.1080/1350486X.2012.660318zbMATH Open1457.91376arXiv1010.2110MaRDI QIDQ3176522FDOQ3176522

C. Gomez, M. R. Grasselli

Publication date: 20 July 2018

Published in: Applied Mathematical Finance (Search for Journal in Brave)

Abstract: A stock loan is a contract whereby a stockholder uses shares as collateral to borrow money from a bank or financial institution. In Xia and Zhou (2007), this contract is modeled as a perpetual American option with a time varying strike and analyzed in detail within a risk--neutral framework. In this paper, we extend the valuation of such loans to an incomplete market setting, which takes into account the natural trading restrictions faced by the client. When the maturity of the loan is infinite, we use a time--homogeneous utility maximization problem to obtain an exact formula for the value of the loan fee to be charged by the bank. For loans of finite maturity, we characterize the fee using variational inequality techniques. In both cases we show analytically how the fee varies with the model parameters and illustrate the results numerically.

Full work available at URL: https://arxiv.org/abs/1010.2110

zbMATH Keywords

incomplete marketsindifference pricingstock loansilliquid assets

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40)

Cites Work

• Stochastic calculus for finance. II: Continuous-time models.
• ACCOUNTING FOR RISK AVERSION, VESTING, JOB TERMINATION RISK AND MULTIPLE EXERCISES IN VALUATION OF EMPLOYEE STOCK OPTIONS
• STOCK LOANS
• Valuing the option to invest in an incomplete market
• Pricing early exercise contracts in incomplete markets

Cited In (8)

• Stock loan with automatic termination clause, cap and margin
• Stock loan valuation based on the finite moment log-stable process
• Stabilization of a stock-loan valuation PDE process using differential flatness theory
• Valuation of non-recourse stock loan using an integral equation approach
• Black economic empowerment regulation and risk incentives
• Pricing of margin call stock loan based on the FMLS
• SHORT SELLING WITH MARGIN RISK AND RECALL RISK
• Stock loan valuation under a stochastic interest rate model

This page was built for publication: Stock Loans in Incomplete Markets

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q3176522)